Blessed with an abundance of hydro, coal and gas resources that one would be hard pressed to find elsewhere, the state of Sarawak has a comparative advantage that is successfully being leveraged to produce bulk power at competitive prices in order to attract capital-intensive investments in heavy industry.

Already a net exporter of liquefied natural gas (LNG), new hydroelectric projects position the state with the potential to become a central provider of power in the proposed ASEAN Power Grid, and supply agreements have already been signed with neighbouring Indonesia, while discussions with Peninsular Malaysia, Sabah and Brunei Darussalam are ongoing.

For the time being, however, it appears that export commitments for the relatively clean and affordable energy source will be contained and power output prioritised to meet growing demand from household and commercial customers, a well as to fulfil supply commitments reached with pioneer investors in the Sarawak Corridor of Renewable Energy (SCORE). Although the state government has placed hydroelectric power at the heart of its growth strategy, coal and gas will continue to play a role in the generation mix. Oil and gas production, long the mainstay of Sarawak’s export base, continues to flourish as new fields are discovered and blocks put out to tender, while gas processing, liquefaction and export facilities are being expanded.

SUPPLY & DEMAND: Local energy demand is forecast to expand from 2286 MW in 2013 to reach more than 8000 MW by 2025, which amounts to more than triple the current generation capacity of 2437 MW. By that time industrial customers in SCORE are expected to consume at least 6000 MW of power, while organic demand from residential, retail and commercial customers throughout the state is expected to expand to 2000 MW. The entity tasked with installing the generation and transmission capacity to meet these swelling demand projections is Sarawak Energy.

The state-owned utility has also been keeping busy and committing vast capital expenditures (capex) over the coming years as it completes feasibility assessments and commences work on the construction of new hydropower facilities; commissions a major new coal-fired power plant that is expected to come on-stream in 2018; introduces new combined-cycle gas plans to the grid; and adds to the backbone of its statewide transmission system.

As of late 2012, around half of Sarawak’s annual generation capacity was accounted for by natural gas, 35% from hydropower and 15% from coal. Moving forward, the state is aiming to reduce the share of fossil sources in its generation mix, aiming for hydropower’s contribution to nearly double to account for 60% of electricity generation by 2020, while coal and gas will each provide 20% of the generation mix.

HYDRO POTENTIAL: The state is home to a vast network of rivers, and although dams are costly to build, they offer cleaner energy and a solid commercial return as running costs are considered low and they have a long lifespan. The surveyed locations that offer the best prospects for damming are situated in the state’s less-developed central interior, and as such they present additional appeal as a key cog in SCORE – the 2008 development plan that aims to shift economic activity to less advanced parts of the state.

Sarawak’s first foray into hydropower was the Batang Ai hydroelectric dam built in the 1980s with a capacity of 94 MW. While it took two decades until the next hydro venture, the 2400-MW Bakun Dam, came about, the time lost between projects was made up for in scale and complexity. Bakun is considered to be the largest dam in Asia, outside of China, and constitutes South-east Asia’s largest civil engineering project to date.

Once Murum Dam, the next major hydro project, becomes fully operational by year-end 2015, an additional 944 MW of power will be added to the mix, bringing the total installed capacity of hydropower to around 3500 MW. This should place the state past the halfway mark towards reaching Sarawak Energy’s goal of having 6000 MW in place by 2030. In addition to the three constructed dams, another 10 hydropower projects are at various stages of feasibility and pre-engineering work, with the potential to contribute 30 TWh of energy per year should they all be pursued.

MEGA DAMS: Bakun, located in Sarawak’s central region, is considered the crown jewel of the state’s cost-competitive energy proposition. With a height of 205 metres, a huge reservoir of around 700 sq km and a storage capacity of 43.8bn cu metres, construction of the mega dam was funded by the federal government and developed and managed by Sarawak Hidro, a wholly owned subsidiary of the Malaysian Ministry of Finance. Together, they own 99% of the mega dam, while the Federal Lands Commissioner owns one share. Based on this favourable acquisition cost, the state-backed utility – which has monopoly rights over the handling of all generation, transmission and distribution projects excluding Bakun – has managed to generate attractive financials from the deal. This has in turn enabled it to easily raise the debt required to fund further dam projects, starting with the country’s second large-scale hydropower project in Murum.

Construction of the Murum Dam hydroelectric project, located on the uppermost part of the Rajang River basin, started in 2008. The dam began filling in July 2013, its first generator was tested in late 2014 and, according to Sarawak Energy, following reliability tests on its four turbine units, production is expected to commence in the second quarter of 2015.

Looking beyond Murum, Sarawak Energy has indicated that it will be allocating RM25bn ($7.6bn) over the coming decade towards new generating plants, that will come in the form of two additional large hydroelectric dams, three new combined-cycle gas plants and an one coal-fired plant. According to the firm, most of the funding will be internally generated, but by 2017 or 2018 they might opt to expand their sukuk, or sharia-compliant bonds, programme that currently amounts to RM15bn ($4.56bn).

NOT WITHOUT CONTROVERSY: As major dam projects typically pose some disruption to local ecosystems, often lead to land and water disputes with local residents, such projects are often met with controversy and public scrutiny. Sarawak’s projects are no exception, and non-governmental organisation and watchdog monitoring has been even more pronounced as the state is home to indigenous ethnic communities and its ecological landscape is a rare natural habitat with unique plant and animal species that are endemic to Borneo. According to environment protection group International Rivers, construction of Bakun led to the resettlement of about 10,000 people and a surrounding flooded area that stretched 69,600 ha, while the flood area for Murum is projected to be 24,500 ha. AngloAustralian mining and metals giant Rio Tinto had in 2008 committed to a $2bn aluminium smelter in the Samalaju Industrial Park (SIP) near Bintulu to be run on electricity provided by Bakun, but in March 2012 it pulled out following a failure to agree on pricing.

“Any development, whether we are talking about energy development, industrial development or infrastructural development, has both positive and negative sides. Sarawak is successfully utilising its natural resources to create a foundation for wealth for the next century, but, of course, the cost side is the social impact of the people influenced by these large-scale projects,” Torstein Dale Sjotveit, CEO of Sarawak Energy, told OBG. “Our job is to try to find a balance in making sure that the people impacted by these projects are given fair treatment, as well as ample opportunities for change and growth. The long-term benefits of these hydropower projects should not overshadow social impacts and every step is being taken to ensure fair and inclusive treatment of those affected.”

According to Sarawak Energy, if and when the next proposed 10-12 dams are developed, just 2% of the state’s vast rainforests will be affected by construction. The argument could be made that this is marginal when considering the pivotal role hydropower is set to play in the state’s socio-economic development.

CHUGGING ALONG: The next two hydroelectric projects slated for construction are the Baram and Baleh dams, which are 700 km apart. The collective electricity generation capacity of the two dams is 1200 MW and the targeted operating date for both is around 2023. “Both projects are highly critical and need to come on-line as soon as possible to meet medium-term demand projections,” Syed Mohamad Fauzi Shahab, director of electricity supply at Sarawak’s Ministry of Public Utilities (MPU), told OBG. “Each has its unique challenges and Baram has to be managed with special caution as there is a community directly affected.”

So far, pre-engineering studies have been conducted for both and indications from Sarawak Energy are that Baleh will be constructed first, as the land acquisition process is more advanced, and so far the project has not been met by protests since the area is mostly uninhabited. Baram, in contrast, has faced opposition from the local community of 6000-7000, leading to blockades that have disrupted preliminary work on the site. With an installed capacity of 1285 MW, the 188-metre-high Baleh Dam is projected to generate 8.076 GWh of electricity per year on average. According to Sarawak Energy, an additional 12 hydro sites, smaller ones located mainly in the central and northern region, have also been identified. Feasibility studies and a social and environmental impact assessment have been completed and received state approval.

COAL CONTRIBUTION: Sarawak also possesses substantial untapped coal reserves. Although coal means higher CO emissions, the state would be remiss not to exploit the resource as a commercially viable alternative. In September 2014 at the Power-Gen Asia Conference in Kuala Lumpur, Sjotveit argued that developing nations still lag behind their more developed counterparts when it comes to CO emissions, stating that it was right “for the Western world to shoulder a bigger responsibility in solving this issue rather than imposing heavy carbon tax on the developing nations”.

For Syed, although it is highly unlikely that all of the state’s hydroelectric dams – the basins of which are physically distant from another – would experience a major drought concurrently, diversified generation is needed to mitigate such a threat. “Given some of the extreme weather patterns the world continues to see, we have to be prepared and cautious and provide investors with the confidence that we are prepared for all eventualities,” said Syed.

While coal-fired power is more expensive than hydroelectric energy, Syed stated that coal-generated electricity will be bundled as part of bulk hydro contracts, assuring the state that there will be a local market for whatever power is produced. In turn, Sarawak Energy should avoid being exposed to the vagaries of the international coal market. The company employs a blended pricing mechanism, and, according to Alvin Lim, the utility’s general manager for corporate planning and strategy, “We do not sell energy linked to the source of generation. We are bundling and aggregating our generation costs and it is on that basis that we determine the cost of energy we have.”

Of the nearly 1.46bn estimated tonnes of coal reserves within the state, most is concentrated within the Mukah Balingian belt, which has a reserve of 550m tonnes, as well as in the Merit Pila area, which has reserves of 470m tonnes. Based on this survey, Sarawak Energy estimates that five new coal-fired plants with a combined generation capacity of 2400 MW could be fed. However, the degree to which the firm pursues new projects depends on the anticipated supply-demand balance.

For now, new coal generation capacity will come from the RM1.5bn ($456.3m), 600-MW Balingian plant, for which a construction contract has been awarded to Chinese electrical-equipment manufacturer Shanghai Electric Group. The blueprint consists of nine smaller projects due in the first quarter of 2018, with the first power facility set to be commissioned by the end of 2017. When on-line, Balingian will join the Mukah coal-fired plant, which began commercial operations in 2010 and comprises two 135-MW boiler-turbine-generator units, as SCORE’s main coal-fired facilities. The city of Kuching, meanwhile, is served by the 330-MW, gas-fired open-cycle power plant at Kampung Geobilt.

THERMAL GENERATION: Five major power stations connected to the Sarawak state grid have a conventional thermal power capacity of 1200 MW, most of which is gas fired, with a further 19 isolated rural diesel and mini-hydropower stations also operated by Sarawak Energy. The largest gas-fired open cycle power plant is a 330-MW facility located at Tanjung Kidurong, Bintulu. Sarawak has 50.12trn standard cu feet (scf) of proven natural gas reserves, which accounts for half of Malaysia’s total, and the state also holds nearly 30% of the country’s 5.85bn barrels of oil reserves.

Although the oil and gas sector, in the form of oilfield services and associated industries, remains the state’s largest GDP earner, most of what is produced is exported, and Sarawak Energy has been negotiating with the national oil company Petronas for higher royalties, as well as for more output to be allocated for local consumption (see analysis). “If we were given more gas, more industry would come, and the federal government would receive more taxes in turn,” said Syed.

WIND & SUN: While green energy forms the key pillar of Sarawak’s investment proposition, it appears that hydropower is the most viable sustainable energy alternative for supplying bulk customers over the short to medium term. The prospects for solar and wind power are marginal and are set to be limited to some smaller scale rural electrification projects. Solar irradiance throughout Sarawak averages between 14 and 16 MJ per sq metre, compared to levels of 20-24 MJ per sq metre in parts of Peninsular Malaysia and Sabah.

Sarawak’s exploitable wind potential also remains restricted, with a mean average wind speed of 1.2 metres per second in Kuching, whereas most windmills require speeds of at least 3-5 metres per second to function efficiently. Indeed, according to Sjotveit, it would take up to 500 sq km of solar panels at a total cost of around RM100bn ($30.42bn) to produce the equivalent amount of electricity that the Bakun Dam accounts for, pointing to the fact that hydro is far and away the more economical renewable option.

LEAVE NOTHING TO WASTE: A more likely complimentary renewable energy source to hydro could come in the form of biomass. As a greater proportion of Sarawak’s timber, palm oil and other commodities become processed in-state rather than being exported (see Industry chapter), the associated waste can be made available as a potential source for biomass production. According to Sjotveit, in some circumstances, for smaller plants, palm oil waste and biofuels could be cost-competitive with coal (see analysis).

RURAL COVERAGE: As of mid-2014, 87.2% of the rural population received electricity coverage, according to Sarawak’s MPU. Building on this, the ministry is targeting a 95% electrification rate by 2020. According to Syed, the remaining 5% of the populace cannot be reached by means of the state grid and will need to be serviced by locally generated “small renewables” that feed into a localised stand-alone grid.

State authorities define small renewables as solar, wind and biogas projects, as well as hydro projects that are less than 10 MW. Osart Jallong, managing director of services provider K-Frontiers, told OBG, “A more appropriate solution to providing power to the remote rural areas of Sarawak is the use of micro and mini hydro power systems. However, as with any other power system, the challenge is always sustainability – putting into place a set of capabilities and systems that will ensure the sustainability of the power system into the future.” With wind prospects limited, mini-hydro, solar-diesel hybrids and biomass stand out as the most feasible small rural electrification options. In a press release for the state’s rural electrification roadmap, titled “Optimal Design and Planning of Hybrid Renewable Energy System for Rural Electrification”, the report said, “Introducing hybrid renewable power systems will significantly minimise fuel delivery and mitigate transport problems, thus reducing maintenance and carbon emissions. It also represents an advantageous and more suitable solution for remote places that could be rich in renewable energy sources, like sun and water, which could be harvested locally for electricity generation”.

KEEPING SCORE: The state’s GDP is expected to expand five-fold by 2030, and to reach this ambitious projection, much is premised on the extent to which power generating capacity can meet the demand that big industrial investors require. By 2025, industrial, commercial and residential customers are expected to consume 8000 MW of electricity, while export commitments should at minimum amount to 430 MW and could be much more depending on how government-to-government negotiations proceed. And on top of these amounts, spare capacity is needed to create a buffer against unforeseen disruptions and allow for routine and scheduled maintenance and repair shutdowns.

While meeting the huge bump in required capacity in just a decade’s time seems an intimidating proposition, considering that over the preceding decade generating capacity expanded from 900 MW in 2004 to reach 2347 MW by the end of 2013, the growth trajectory seems surmountable. “The amount of energy resources we have is adequate, and as long as all goes to plan, this should remain the case,” said Syed.

HEAVY INDUSTRY: The Regional Corridor Development Authority, the agency tasked with overseeing and managing SCORE’s development, estimates the central corridor region contains 20,000 MW of hydropower potential, 1.47m tonnes of coal reserves and 50.12trn scf of natural gas. A large portion of the available energy mix is concentrated near the district of Bintulu, and most early-stage energy-intensive SCORE investments are taking place in the 8000-ha Samalaju Industrial Park (SIP), located 60 km north of Bintulu town. “There are not many places in the world where hydropower is available so nearby to consumers and where hydro plants are able to be located in areas that do not require long transmissions lines in order to be accessible,” said Paul Koon, group CEO of Press Metal, a SCORE pioneer investor and aluminium producer.

Of the 19 projects worth RM32bn ($9.73bn) that have been approved within SCORE to date, the majority – 15 projects priced at RM27bn ($8.21bn) – have taken up occupation within the SIP. Constituting aluminium and steel (ferro-alloy and manganese) smelters, silicon manufacturing plants, and petrochemical facilities (an integrated phosphate complex and an ammonia plant), all of the flagship investments that the SIP has so far received are predicated on accessing reliable and attractively priced electricity.

Some of the larger plants currently in operation in the SIP or slated to commence operation within the next few years include: OM Material Sarawak, a $592m ferrosilicon and manganese alloy joint venture that has signed a 20-year agreement with Sarawak Energy for the supply of 500 MW; and Tokuyama Malaysia, a subsidiary of Japan’s Tokuyama Group that has set up a RM8bn ($2.43bn) polycrystalline silicon manufacturing facility and signed a power purchases agreement (PPA) for the first phase of its project in 2011 for 140 MW over a 10-year period. PPAs with Sarawak Energy subsidiary Sarawak Electricity Supply Corporation (SESCO) include: Press Metal, a 320,000-tonnes-perannum aluminium smelter with an agreement of 200 MW that runs for 25 years; Sakura Ferroalloys, a manganese alloy producer that reached a PPA for 80 MW; and a RM1.04bn ($316.37m), 500,000-tonne-capacity integrated phosphate complex jointly owned by a Cahya Mahta Sarawak, Malaysian Phosphate Venture and Arif Enigma that is expected to be completed in 2018 and for which a PPA term sheet with SESCO for 150 MW has been signed.

TARIFF DEBATE: A large proportion of the newly available energy for transmission that should come about has already been committed to energy-intensive plants in SCORE as part of their original PPAs, including that from the completion of the final stage of the Bakun Dam, which will raise capacity to 2400 MW; Murum Dam, coming on-line mid-2015 with 944 MW, and the coal plant in Balingian, with 600 MW becoming operational in 2018. This has prompted some concern that the power needs of long-established manufacturers operating outside of SCORE nodes risk being neglected.

The 813-ha Sama Jaya Free Industrial Zone, located 16 km from Kuching’s city centre, began in 1991 with a focus on the high-tech sector, particularly electrical and electronics manufacturing. Many of the zone’s current tenants are involved in the manufacture of semiconductor material and components, an electrical and electronics sub-segment that relies on favourable electricity tariffs to remain competitive.

Electricity costs for general, non-bulk users in Sarawak are comparable with the rates in other states across the rest of the country. Industrial consumers pay from RM0.14-0.40 ($0.04-0.12) per KWh, depending on volumes and times, which is roughly on par with mainland rates at RM0.13-0.44 ($0.04-$0.13) per KWh, according to the Malaysia Energy Information Hub.

“If preferential rates were not offered, the big investors would not come and this would be a huge loss to the state. It is basic economics and business logic for a utility to provide discounts to its bulk consumers. It is a practice that happens the world over,” Abdul Karim bin Tun Abang Haji Openg, president of the Sarawak Chamber of Commerce and Industry, told OBG in explaining Sarawak Energy’s tariff methodology.

THE IN-GROUP: In order to qualify as a bulk customer, a company’s power needs may start at 20 MW. “For smaller players, these bulk agreements would not work, as they need flexibility in their operations. The security required as collateral on these agreements also prevents smaller companies from accessing these preferential rates,” said Sjotveit. The majority of PPAs are formed on a 10-15 year basis with a cost escalation of 1.5-2.5% built into the contracts. Looking forward, as Sarawak Energy reaches future deals with prospective SCORE investors, the track record established in meeting commitments places the provider in a stronger negotiating position to charge higher tariffs than SCORE’s first entrants received. “It is really about timing. If you were an early investor and took on a higher risk, it only makes sense that the tariff structure received is more favourable. Pricing is market driven,” said Syed.

In addition to demand matching and perhaps exceeding the growth of supply, another factor contributing to an expectation of higher future bulk tariffs is that the cost of energy generation is escalating. Early SCORE investors were receiving their power supply directly from Bakun, which is considered the most inexpensive and efficient of the state’s dams.

Whereas the newer dam and coal projects are expected to entail much higher cost structures, and in turn the blended pricing mechanism will result in newer entrants having to pay more for their energy. “SESCO is a business entity and receives no state guarantee. It, along with Sarawak Energy, has to operate commercially and generate a good return so that it can acquire a good credit rating and access a good rate of borrowing,” said Syed. He is also quick to point out that a competitive power price is just one of many benefits that investors in SCORE can tap into when negotiating for an investment package.

HOUSEHOLD TARIFFS: At a 2014 state legislative session, it was announced by Adenan Satem, chief minister of Sarawak, that household electricity rates would be lowered in 2015 by between 2% and 40%, depending on monthly consumption patterns, and that tariff reductions could also extend to commercial and industrial customers later in the year.

Domestic tariffs have not been altered since 1992, and households in Sarawak pay RM0.29 ($0.08) per KWh, which is below the RM0.38 ($0.11) per KWh that residential customers in Peninsular Malaysia pay to the national utility provider, Tenaga Nasional (TNB), and much less than the RM0.65 ($0.19) per KWh rate for households in Singapore. Indeed, Sarawak is Malaysia’s least populated state, and Sarawak Energy argues against tariff reductions on the basis that supplying electricity to remoter communities over challenging terrain is a costly task, and that lowering tariffs below cost recovery will impact their bottom line and inhibit their ability to spend on much needed infrastructure upgrades and expansion. The firm contends that until a deal is struck with the federal government on receiving higher oil and gas royalties, it cannot financially absorb a round of rate reductions.

TRANSMISSION BACKBONE: Sarawak Energy is committing RM1.2bn ($365.04m) towards the construction of a new backbone transmission system, tapped for completion by the end of 2016. Two sections of the 500-KV second grid, which is set to stretch over 500 km from Samalaju to Kuching, have been allocated as RM619m ($188.3m) contracts to a partnership involving Sinohydro and Sarawak Cable. The Chinese and local outfit have a track record of collaborating on transmission projects in the state dating back to 2008, having completed joint work on the Bakun-Similajau Line and the Murum Junction Transmission Line.

LOCAL GIANT: Aside from Sarawak Energy, Sarawak Cable, which has been awarded a large share of the state’s transmission line and power substation supply and contract work, stands out as the privately held firm that is set to benefit the most from the state’s energy ambitions. The company is also on a path to transform itself into one of Asia’s leading transmission line entities. Incorporated in 1998, Sarawak Cable manufactures multicore power cables, wires and high-voltage bare conductors, and is among the leading steel fabricators in the state. Its contract work focuses on the supply, installation and commissioning of transmission line projects, with these accounting for 70% of turnover.

In December 2014 the company acquired Universal Cable and Leader Cable Industry, two of Peninsular Malaysia’s largest cable firms. Upon the approval of the sale of the two market leaders, with five factories between them, Sarawak Cable captured over 50% of national market share. The three companies involved in the deal are among the 13 Malaysian manufacturers that are eligible to supply cable to TNB. The national utility has announced it is aiming to spend in excess of RM23.3bn ($7.09bn) between 2014 and 2017 to improve west Malaysia’s power grid. Sarawak Cable is positioned strongly to compete for project work.

SUPPLYING WATER: With a population of 2.6m, demand for water in Sarawak is likely to remain steady. In 2013, the latest year for which data was available, Kuching’s water treatment plants (WTPs) supplied an average of 449.5m litres of water per day, while consumption averaged 450.11m litres. Average daily demand was highest in May at 459.27m litres. WTP Module 7 & 8 and WTP Module 5 & 6 were the state’s two most important plants, contributing 56.18bn litres and 60.76bn litres, respectively.

Although the provision for both domestic and industrial consumers remains adequate, there is concern that the system’s capacity is being stretched and that water usage is too high. An audit of state WTPs in the second half of 2013 has echoed these concerns, stating that while the plants complied with regulations, maintenance on six of the 14 WTPs was not able to meet with official standards. Moreover, the report found that the budget was not drawn in accordance with an annual maintenance schedule, meaning allocations were often not sufficient to carry out any preventative works and problems were left to be addressed as required.

Consumption levels are also a wider concern for state authorities amid the prospect of a water shortage in Malaysia as a whole. Local press has reported that daily water usage stands at around 203 litres per person, with levels in Sarawak estimated to be higher. The Federation of Malaysian Consumers Association has advised citizens to maintain a level of 80 litres per person per day, and the Kuching Water Board has also encouraged residents to use water sparingly, as well as having devised a Drought Contingency Plan.

OUTLOOK: Malaysia’s vision for 2020 calls for Sarawak to attain the status of a high-income state by the turn of the decade via transitioning its production base away from basic commodities into more value-added manufacturing. Further unlocking sustainable and competitively priced energy is critical to achieving this goal.

State officials are negotiating with the federal government for a higher ownership stake and control over Sarawak’s energy resources. It is still too early to assess the extent to which the downward cycle in global oil prices will affect upstream exploration and production activity, as well as the construction of export facilities. However, in the long term Asia is set to remain a region that is hungry for a greater range of energy sources to help keep up with rapidly growing demand among an expanding middle class. In this regard. Sarawak’s resource and strategically advantageous geographical location should result in its playing a critical role within the region’s up and downstream supply chain.